The government has unleashed a series of reforms to drive the economy, which have all been hailed by industry as game-changers. Yet variables like investment, corporate profits, growth, inflation, etc, have not really been up to our expectations. Why?
A common statement made by analysts, rating agencies, multilateral institutions and corporates is that we need to have more structural reforms. There is nothing wrong in asking for more reforms, because striving for the ideal is always good as it brings us somewhere closer if pursued. But, do all these reforms matter in the short and medium run, or is it just a case of asking for more when all that is involved is good housekeeping?
If one goes back to FY14 and FY15, it was often argued that the economy slowed down due to policy paralysis which was the result of several irregularities in administration, and which ultimately affected growth. The decline to 4.5% GDP growth, going by the earlier base year, was largely due to the government. However, when most of these points were addressed adequately by the new government in a transparent manner, the growth rates have changed by not more than 1% (by the new methodology). And yet we are still unhappy with reforms. Is there something amiss in our expectations and interpretation?
The argument here is that the government, through policies or reforms, is an enabler of growth, and the basic growth impulses cannot be changed unless there is money put on the table. We have an acute demand problem which has to be addressed for any turnaround. Hence, even if we make it very easy to do business, investment will not come in if there is insufficient demand. The Fiscal Responsibility and Budget Management (FRBM) puts constraints on the amount that can be spent by the government and probably has militated against growth.
The NDA government has unleashed a series of measures through reforms to drive the economy, which have all been hailed by industry with the bromide called ‘game-changers’. Yet variables like investment, corporate profits, growth, inflation, etc, have not really been up to our expectations. So, what have been the leading reform measures taken by the government.
First, the Make-in-India campaign covered 25 sectors and the focus is on investment, both domestic and foreign. We have seen our rank improve on the list of ease of doing business by the World Bank.
Second, the Ujwal Discom Assurance Yojana (UDAY) is a remarkable scheme that will transform the power distribution sector and has been progressively accepted by many states. When implemented by states with corresponding reforms in transmission and distribution (of electricity) and pricing, the health of distribution companies will improve substantially.
Third is Indradhanush, which is a plan to rework the way PSBs function, both in terms of business and governance. This is probably one of the most important banking reforms since the Narasimham Committee.
Fourth, Pradhan Mantri Jan-Dhan Yojana, payments banks, small banks are major reforms in financial inclusion which will reach out to the poor and also help in payment of subsidies.
Fifth, the various insurance programmes for the poor complement the banking inclusion programmes on the security front.
Sixth is the Start-up India initiative, which addresses employment as well as funding, and encourages the spirit of entrepreneurship. Combine this with the Micro Units Development and Refinance Agency Bank (Mudra Bank), and we can see that a distinct thrust on the SME segment has been on the forefront of the policy lens.
Seventh is Skill India, which addresses lacunae for generating such skill-sets that are currently missing and provides an opportunity for the demographic dividend of the country.
Eighth, the new crop insurance scheme of the government. It is a progressive reform which makes it easier for farmers to get cover in case of adverse monsoon rains, and also spares the banks of NPAs and the government of loan-waiver payments.
Ninth, FDI has opened up to defence and railway equipment, and limits for insurance have been enhanced.
Therefore, opening these sectors to foreign investors is a major positive step taken by the government.
Ten, labour issues have been addressed for smaller units to eschew harassment and provide better facilities for labour, especially women.
Last, the National Investment and Infrastructure Fund (NIIF) will provide the springboard for further creation of infrastructure in the country.
The list is fairly long, at almost one major reform a month. Other initiatives have been launching Digital India as well as Swachh Bharat Abhiyan, which are again progressive ones. Coal and telecom auctions were carried out quite smoothly, which takes care of the issue of allocation of natural resources. All this has been done by sticking to the fiscal targets as well as having monetary policy targeting an inflation objective, thus making it more predictable. In addition, there has been rationalisation of subsidies which helps in adhering to FRBM norms.
After all this, what are we complaining of in terms of reforms?
This is important because, ostensibly, there are three issues that are now being citied as action points. These are goods and services tax (GST), land reforms and environment.
* GST is in the final stages of being passed and, given the complexity of the structure of the country and the federal nature, getting all states to agree is a legislative and logistical challenge. We seem to be closer to the end now.
However, practically speaking, GST will ease business and not really add to fresh investment or production. Counter-intuitively speaking, if it would, then this should be the reason for producers holding back their output, which is not the case.
* Resolving land sale through a formula is one thing, but be sure that even if it is passed, it will not open the floodgates of investment, as enterprise will complain of the high land cost. One can’t have it both ways.
* Environment is a very circular factor which all countries are aware of, so having prudential guidelines is a must or else we could also go the China way. There can be no compromise on this one.
The time has come for investors and entrepreneurs to stop complaining and take advantage of all the good work that has been done by the government. We need to show that we react to positive impulses from the government before asking for more. It would also be interesting in case foreign agencies list out what they expect in terms of reforms, with some anecdotal proof of such reforms bringing about big changes in their investment, or opinion of countries which have gone for the same. Otherwise, it appears that analysts are just complaining for the sake of it. There is evidently need for introspection whenever anyone asks for more.
If one goes back to FY14 and FY15, it was often argued that the economy slowed down due to policy paralysis which was the result of several irregularities in administration, and which ultimately affected growth. The decline to 4.5% GDP growth, going by the earlier base year, was largely due to the government. However, when most of these points were addressed adequately by the new government in a transparent manner, the growth rates have changed by not more than 1% (by the new methodology). And yet we are still unhappy with reforms. Is there something amiss in our expectations and interpretation?
The argument here is that the government, through policies or reforms, is an enabler of growth, and the basic growth impulses cannot be changed unless there is money put on the table. We have an acute demand problem which has to be addressed for any turnaround. Hence, even if we make it very easy to do business, investment will not come in if there is insufficient demand. The Fiscal Responsibility and Budget Management (FRBM) puts constraints on the amount that can be spent by the government and probably has militated against growth.
The NDA government has unleashed a series of measures through reforms to drive the economy, which have all been hailed by industry with the bromide called ‘game-changers’. Yet variables like investment, corporate profits, growth, inflation, etc, have not really been up to our expectations. So, what have been the leading reform measures taken by the government.
First, the Make-in-India campaign covered 25 sectors and the focus is on investment, both domestic and foreign. We have seen our rank improve on the list of ease of doing business by the World Bank.
Second, the Ujwal Discom Assurance Yojana (UDAY) is a remarkable scheme that will transform the power distribution sector and has been progressively accepted by many states. When implemented by states with corresponding reforms in transmission and distribution (of electricity) and pricing, the health of distribution companies will improve substantially.
Third is Indradhanush, which is a plan to rework the way PSBs function, both in terms of business and governance. This is probably one of the most important banking reforms since the Narasimham Committee.
Fourth, Pradhan Mantri Jan-Dhan Yojana, payments banks, small banks are major reforms in financial inclusion which will reach out to the poor and also help in payment of subsidies.
Fifth, the various insurance programmes for the poor complement the banking inclusion programmes on the security front.
Sixth is the Start-up India initiative, which addresses employment as well as funding, and encourages the spirit of entrepreneurship. Combine this with the Micro Units Development and Refinance Agency Bank (Mudra Bank), and we can see that a distinct thrust on the SME segment has been on the forefront of the policy lens.
Seventh is Skill India, which addresses lacunae for generating such skill-sets that are currently missing and provides an opportunity for the demographic dividend of the country.
Eighth, the new crop insurance scheme of the government. It is a progressive reform which makes it easier for farmers to get cover in case of adverse monsoon rains, and also spares the banks of NPAs and the government of loan-waiver payments.
Ninth, FDI has opened up to defence and railway equipment, and limits for insurance have been enhanced.
Therefore, opening these sectors to foreign investors is a major positive step taken by the government.
Ten, labour issues have been addressed for smaller units to eschew harassment and provide better facilities for labour, especially women.
Last, the National Investment and Infrastructure Fund (NIIF) will provide the springboard for further creation of infrastructure in the country.
The list is fairly long, at almost one major reform a month. Other initiatives have been launching Digital India as well as Swachh Bharat Abhiyan, which are again progressive ones. Coal and telecom auctions were carried out quite smoothly, which takes care of the issue of allocation of natural resources. All this has been done by sticking to the fiscal targets as well as having monetary policy targeting an inflation objective, thus making it more predictable. In addition, there has been rationalisation of subsidies which helps in adhering to FRBM norms.
After all this, what are we complaining of in terms of reforms?
This is important because, ostensibly, there are three issues that are now being citied as action points. These are goods and services tax (GST), land reforms and environment.
* GST is in the final stages of being passed and, given the complexity of the structure of the country and the federal nature, getting all states to agree is a legislative and logistical challenge. We seem to be closer to the end now.
However, practically speaking, GST will ease business and not really add to fresh investment or production. Counter-intuitively speaking, if it would, then this should be the reason for producers holding back their output, which is not the case.
* Resolving land sale through a formula is one thing, but be sure that even if it is passed, it will not open the floodgates of investment, as enterprise will complain of the high land cost. One can’t have it both ways.
* Environment is a very circular factor which all countries are aware of, so having prudential guidelines is a must or else we could also go the China way. There can be no compromise on this one.
The time has come for investors and entrepreneurs to stop complaining and take advantage of all the good work that has been done by the government. We need to show that we react to positive impulses from the government before asking for more. It would also be interesting in case foreign agencies list out what they expect in terms of reforms, with some anecdotal proof of such reforms bringing about big changes in their investment, or opinion of countries which have gone for the same. Otherwise, it appears that analysts are just complaining for the sake of it. There is evidently need for introspection whenever anyone asks for more.
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